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Fiscal policy and economic growth: a simulation analysis for Bolivia
Analíti a
k
4
Revista de Análisis Estadístico
Journal of Statistical Analysis
Bolivia’s poverty reduction strategy is entirely based
on conditional transfers to households. The amount trans-
ferred to households has increased substantially as a share
of GDP in recent years, from 0.7 percent of GDP in 2006 to
2.3 percent of GDP in 2008, as seen in figure 5.
7
Finally, figure 6 shows how the fiscal deficit has been
financed in recent years. As is common in public budget
accounting, we report net external credits and net domes-
tic credits. Over the years of fiscal deficit (2000-2005), net
external credits increase until 2002 and then taper off con-
tinuously until 2006. Net domestic credits also decreased
steadily from 2002 to 2006, with substantial substitution
between foreign and domestic debt, the latter of which out-
weighed foreign-held debt by 2006. Most domestic debt is
financed by the Pension Fund Administrators (AFP) and
the Central Bank. The government has been able to reduce
its debt with the Central Bank thanks to recent fiscal sur-
pluses. Net domestic credits have thus been negative since
2006.
Figure 6.
Financing of the fiscal deficit (% of GDP). Source: Cen-
tral Bank of Bolivia.
In sum, Bolivian fiscal policy is operating in a new
macroeconomic context, with increasing revenues as well
as new public sector responsibilities for state-owned en-
terprises (SOEs) and policy commitments to achieve sus-
tained poverty reductions in Bolivia. Ideally, this fiscal pol-
icy should also be consistent with sustained growth and
improved welfare for the general population. These issues
will be analyzed in the following sections.
3 Modelling and calibration
3.1 The basic model
The model is based on Chumacero, Fuentes and
Schmidt-Hebbel (2004), has been modified to investigate
public infrastructure investments as in Rioja (2003) and has
been expanded further to model a multi-sector economy as
done by Estrada (2006).
3.1.1 Households
The economy in our model is comprised of infinitely-
lived individuals who derive utility from consumption
of importable goods (
c
m
,
t
), consumption of non-tradable
goods (
c
n
,
t
) and government consumption (
g
t
). The last of
these is essentially a public good that is not characterized
by congestion. Representative agents thus maximizes the
expected value of lifetime utility as given by
E
t
∞
∑
t
=
0
β
t
u
(
c
m
,
t
,
c
n
,
t
,
g
t
)
(1)
The other goods produced in the economy are exportable
goods, denoted as
xh
for hydrocarbons (natural gas),
xm
for minerals (zinc, gold, silver or tin) and
xa
for the agri-
cultural good (soya, Brazilian nuts or quinoa).
Each household receives interest income
rk
, lump-sum
transfers from the government , profits
π
m
,
π
n
,
π
xh
,
π
xm
and
π
xa
respectively from firms in the importable, non-
tradable, hydrocarbons, mineral and agricultural sectors
8
and can also buy foreign debt abroad,
b
. The household’s
budget constraint is given by
(
1
+
τ
m
)(
1
+
τ
c
)
c
m
,
t
+ (
1
+
τ
c
)
p
n
,
t
c
n
,
t
+ (
1
+
τ
m
)(
1
+
τ
c
)
i
t
+ (
1
+
˜
r
t
)
b
t
≤
(
1
−
τ
k
)
r
t
k
t
+
π
xh
,
i
+
π
xm
,
t
+
π
xa
,
t
+
π
m
,
t
+
π
n
,
t
+
b
t
+
1
+
Γ
t
(2)
Where
τ
m
is an import tariff,
τ
k
is the tax rate on capital
income,
τ
c
is the tax rate on consumption of importables
and non-tradables,
p
n
is the price of the non-tradable good
using importable goods as the numeraire and ˜
r
is the (net)
interest rate paid on foreign debt. Private investment, de-
noted as
i
, follows the standard law of motion for private
capital:
k
t
+
1
=
i
t
+ (
1
−
δ
)
k
t
(3)
where
δ
is the depreciation rate for private capital stock
and
k
t
is the stock of private capital.
The representative household chooses
c
m
,
t
,
c
n
,
t
,
b
t
+
1
and
k
t
+
1
. This is the same as saying that the representative
consumer’s problem can be summarized by the following
Bellman equation:
v
(
k
t
,
b
t
) =
β
v
(
k
t
+
1
,
b
t
+
1
) +
u
(
c
m
,
t
,
c
n
,
t
.
g
t
)
−
λ
c
m
,
t
+ (
1
+
τ
c
)
p
n
,
t
c
n
,
t
+
c
m
,
t
+
(
1
+
τ
c
)(
k
t
+
1
−
(
1
−
δ
)
k
t
) + (
1
+
˜
r
t
)
b
t
(
1
−
t
k
)
r
t
k
t
−
π
xh
,
t
−
π
xm
,
t
−
π
xa
,
t
−
π
m
,
t
−
π
n
,
t
−
b
t
+
1
−
Γ
t
(4)
The first-order conditions are:
p
n
,
t
=
u
′
cn
,
t
u
′
cm
,
t
(
1
+
τ
m
)
(5)
7
There are currently three types of conditional transfers: Renta Dignidad (for persons over 60 years of age), bono Juancito Pinto (for students in
primary school) and bono Juana Azurduy (for mothers during and after pregnancy).
8
Profits can be interpreted also as the remuneration to labour because we assume that labour is sector-specific.
Analítika,
Revista de análisis estadístico
, 2 (2012), Vol. 4(2): 57-79
61